Toward Better Forms Of Managed Care

Don’t be fooled, warns the noted health care economist: High-quality care costs more, not less. The Internet will increase demand for the best care.

J.D. Kleinke is the founder and president of Denver-based Health Strategies Network. The company provides Internet strategy, design, and development services for pharmaceutical and biotechnology companies, and operates, an information service that helps providers and patients get reimbursement for prescription drugs.

Kleinke, who holds a master’s degree in finance from Johns Hopkins University, is a frequent commentator on the health care industry whose articles regularly appear in professional literature and popular forums. His most recent book, Bleeding Edge: The Business of Health Care in the New Century, was published in 1998. In it he contends that the current managed care model was doomed to fail, citing the cultural incompatibility between managed care business strategies, medical practices, and consumer demands. Kleinke spoke recently with Senior Contributing Editor Patrick Mullen.

MANAGED CARE: Tell me about your company and the kind of work you’re doing.

J.D. KLEINKE: We are focusing on information technology as it relates to pharmaceutical marketing strategy. That translates into using the Internet for physician business education, increasing consumer access to that same information, and helping doctors and patients deal more effectively with managed care.

MC: Who are your clients?

KLEINKE: Our clients are the major pharmaceutical and biotechnology companies.

MC: You’re helping them market to either managed care organizations or consumers — or both?

KLEINKE: Both. A typical drug company has three customers: the prescriber, the consumer, and the payer. It builds web sites for all three. I learned a long time ago that in the health care information business, regardless of who ultimately uses information, it’s a drug company that usually funds it somewhere along the line. Knowing that this is an inevitability of the system, we decided to focus on where we were going to end up anyway.

MC: is designed to help physicians and consumers get reimbursed for certain brand name drugs. What’s the need?

KLEINKE: One of the things the managed care industry has sought to do is rationalize utilization of expensive resources. Managed care exists as a check on whether or not a drug or a biotech product is really necessary for a patient. The job of managed care is to act as an auditor on medical utilization.

MC: Although that wasn’t the intent of managed care, that’s how it’s turned out. In the early days, the goal was something different.

KLEINKE: The original goal was somewhat paradoxical, specifically to increase the utilization of certain resources.

MC: Spend on preventive services at the front end and save on costly and intensive things later on?

KLEINKE: Exactly. It was originally meant to provide cradle-to-grave coverage. HMOs could invest on the front end on resources for wellness. But the reality of enrollment turnover and the short investment and payback horizons of Wall Street have changed all that. The health mission of investing in members long term has been subsumed by the need to control short-term medical spending. To do that, plans have put inordinate attention on pharmaceutical and biotech products because they represent a broad high-volume utilization of expensive resources. What they don’t appreciate is the fact that these resources actually reduce the much higher unit costs of a hospital day or a specialist visit.

MC: They’re looking at a number on their budget and they’re saying that number is too high.

KLEINKE: Correct, and as a result they approach this from a perspective of suspicion. It’s basically, “You don’t get the drug or biotech product unless you can demonstrate the following clinical need.” They create a fairly onerous process for physicians and patients with the burden of proof being placed on them before they can have access to these products. You’ve got a well-organized managed care organization that is good at saying “no” and has created a lot of systems to get in the way of saying “yes.” The rules and systems and the ways to navigate them aren’t explicit. They aren’t published anywhere, so nobody has good access to the information with regard to exactly what’s required to get a drug approved or an expensive biotech product preauthorized. As a result, the burden of proof is on physicians, who are poorly organized and don’t have good access to those systems and those rules, and consumers, who have even less access. The managed care company often wins by default. Pharmapath was created specifically to level that playing field, to provide physicians and consumers with ready, universal, Internet-based access to the rules. Simply put, it’s a way to help the less-organized and the less-mobilized players.

MC: There are a whole bunch of companies involved. It’s not like this is the marketing arm of one drug company.

KLEINKE: Absolutely. We’ve made it very clear that we don’t give exclusives. We want this to be useful to everybody, and if we go down the road of favoring one drug company over another then we become really just a marketer of selected drugs. We are building a site. A lot of pharmaceutical companies are less than pleased with that, but I tell them the site is more useful to their individual products if the site is universally useful to all physicians.

MC: If physicians see it as marketing, they will ignore it.

KLEINKE: Correct. That would be unfortunate because Pharmapath focuses on one of the biggest administrative hassles that physicians deal with day to day.

MC: Shouldn’t the selection of a pharmaceutical or biotech product be a decision that the physician makes based on best available information?

KLEINKE: In theory, yes, but there’s a certain segment of the managed care industry that believes that there is no objective and scientific decision making on the part of physicians with regard to prescribing choices. They believe that doctors are beholden to marketers.

MC: So they are susceptible to the first in the door with the samples.

KLEINKE: Yes, which creates inordinate demand above and beyond what’s required medically.

MC: Drug companies wouldn’t spend hundreds of millions of dollars in consumer advertising if they didn’t think it would work, right?

KLEINKE: Of course not. And what of it? Right now, it is fashionable to criticize drug advertising to consumers. They’re the bad guys, and supposedly, their marketing results in drugs being overutilized and overprescribed. But think back three or four years. All the talk in the health care industry was about disease management — the end result of which means more prescriptions and more refills.

MC: In fact the whole argument about extending the prescription drug benefit to Medicare would suggest that they want to extend access to more medications to more people.

KLEINKE: Precisely.

MC: In one of your recent articles you disputed the common notion that higher-quality care costs less. You said higher-quality costs more, whether it is a good pair of shoes, a gourmet restaurant meal, or easy access to the best medicine. This is how markets work. To what degree do people not seem to get that?

KLEINKE: Nobody gets it. Employers don’t get it, the American people don’t get it, and the typical managed care brochure reader doesn’t get it. Managed care has, for years, framed this issue in its own terms, which is that low-cost HMO insurance is going to result in higher quality health care. That’s a fundamental contradiction. It contradicts market economics; it contradicts common sense. Every rigorous academic study of the subject has shown that immunization and other preventive medical care that we provide to keep people healthy and to capture disease early on actually does cost more money in the short run. Prevention costs more than cures do, because of the epidemiological fact that you can screen a hundred thousand people for cancer but you’re only going to prevent five or six cases. Better quality costs more and everybody knows this everywhere else in the economy.

MC: Part of the problem is that the U.S. hasn’t decided whether health care is a public or private good.

KLEINKE: We grew up believing it’s paid for by somebody else, therefore we are entitled to the very best that can be paid for and that’s a huge problem culturally and it’s not changing.

MC: It’s not part of the general public discourse.

KLEINKE: People are very confused. People don’t believe that the government owes them a better house. Maybe the government owes them Section 8 housing, but the government doesn’t owe them a suburban mansion. In health care, however, we’ve turned it around and believe that the government not only owes us Section 8 housing, it owes us a mansion in the suburbs.

MC: I’m not surprised at this confusion because for the Medicare and Medicaid population the federal government has made a promise. Whether that promise is being delivered efficiently is a whole different subject, but the promise is there for some but not for most.

KLEINKE: In the employed market there seems to be sure movement toward defined contribution. In general, employers are offering more varieties and one of the reasons that big HMOs consolidate is they can offer one-stop shopping. So they can agree to three very different consumer tiers: an old-line indemnity plan where you get anything you want, a PPO that gives you some flexibility but is still a more tightly cost-managed system, and an HMO product where things are managed very tightly and it’s cheaper.

MC: The Internet feeds the notion that as a patient or a consumer I’m going to have more access to information now. How is that unfolding?

KLEINKE: It accelerates the broader health information revolution already under way as society ages. I can turn on the nightly news and see a story about the latest medical study that may, or may not, be relevant to me or a family member. However, I can go on the Internet and find exactly the latest relevant news.

MC: If you’re a candidate for knee replacement, you can find whatever you want.

KLEINKE: And I will then demand whatever I now know to want from my hospital or surgeon. That never happened 10 years ago. I’ll demand a better drug to prevent a complication or a better drug for pain management. That’s what the Internet does. I think the Internet induces demands for brand-name products and state-of-the-art therapies that people would not have known about before.

MC: One cautionary note is that there is a lot of bad information on the Internet. How close are we to being able to direct people to places where there’s some reliable information?

KLEINKE: A new and critical job for the primary care physician is teaching people how to use the Internet. I think part of primary care is going to be to train people how to identify good versus bad information on the Internet. That means the physicians themselves need to understand what’s good and what’s bad on the Internet. The drug companies can help. There are a number of certifying organizations that are emerging right now, partly funded by the drug companies, that will certify information on the Internet.

MC: How should physicians be paid in a way that makes sense to them and to their patients and to the people who are paying them?

KLEINKE: Fee-for-service payment is a dysfunctional system. The incentives encourage physicians to overtreat. We need to move toward some risk-based form of payment, whereby the physician gets paid to treat the whole patient, not a clinical line item associated with that patient. Call it episode-based payment, which is a nice balance between the two extremes of fee-for-service and capitation.

MC: By saving the historical evidence of people who are my age and gender, you can estimate if you have a big enough pool?

KLEINKE: The problem is that most physicians don’t have a big enough pool at the physician level, and that’s why you need big groups to absorb that risk. Let’s say that of 100 patients, one will have a heart attack and the other 99 will be fine. The typical physician group isn’t big enough, organized enough, to accept underwriting risk if it expected one heart attack patient but ended up with five. That’s the hard thing we learned about capitation. I think we need to subdivide risk. The underwriting risk piece didn’t work, and that’s why capitation didn’t work. By contrast, there’s something called contact capitation that says, “OK, don’t give us 100 patients and hope that only one of them has a heart attack. Give us the one with the heart attack and then give us a lump sum of money and let us manage the case cost associated with somebody who is already presented as a sick person.”

MC: In other words, “We’re gonna be prepared to handle that, because that’s what we do”?

KLEINKE: That’s it, and that’s how you’re trained to think as a doctor. Instead of paying me for every time the patient comes into the office and every time I prescribe something and do a lab test — instead of paying me all those line items, pay me to simply take care of this guy. That’s exactly what the DRG system did for hospitals. That’s been one of the very few successes in health care payment history. People will argue that it’s caused early discharge, created more complications, and other things. But the reality is that in several hospital-based health studies, status has been stable and we haven’t seen high complications or readmission rates for years. DRGs have turned out to be a tremendous success. They’ve forced hospitals to function with some discipline by thinking: “We’re going to admit somebody with heart failure and we’re going to get a lump-sum payment.” That has worked splendidly. That’s been the single greatest success in the history of reimbursement in the U.S. health care system. I think that’s exactly the model for how we ought to pay primary care physicians.

MC: Do you believe that physicians will re-emerge as the crucial player?

KLEINKE: Absolutely. Physicians are the U.S. health care system. They always have been and they always will be. As a society, we respect doctors and we don’t respect insurance bureaucrats. When you are desperately ill you don’t run to your HMO’s web site. You run to your doctor.

MC: What’s your sense of how the managed care industry will evolve?

KLEINKE: It’s not going to be a whole lot different any time soon. The industry is kind of in an arrested phase right now, digesting a lot of consolidation. When that consolidation is finished, the health insurance industry in five years is going to look like it did 25 years ago. There are going be seven or eight major national health insurance organizations, the local Blues plans, and little else.

MC: Do you think medical savings accounts are going to stick around for a while?

KLEINKE: No, but there’s going be something like them. They’ll probably look most like what’s called a flexible spending account if only because those are the things that have gotten the least political attention. They’re a little bit like MSAs and a little bit like defined contributions. They basically say that my employer will pay for the bare-bone catastrophic stuff, and if I want Viagra and elective surgery and nutritional counseling from an M.D. for hundreds of extra dollars, I can do that. I’ve just got to spend my own money. Except that I’ll really only be spending 60 cents of my own dollar [because of tax breaks], and that’s important.

MC: Do you think there’s any long-term future for physician unions?

KLEINKE: I think collective bargaining, in the classic trade-union model, is viable for certain physicians in certain markets where they don’t have good IPA representation. It becomes a default alternative to a much more businesslike arrangement such as an IPA. Trade unions are not consistent with the spirit of the profession, which is more professional, entrepreneurial, and business oriented. There’s also the broader issue that trade unionism is dying in this country. You can engage an employee in profit sharing and stock options even at the factory floor level. That makes being in a union obsolete; it makes workers partners in the business, not adversaries to it. Physicians get productivity bonuses and profit sharing. Why bargain collectively?

MC: Thank you.